Cash Flow Forecasting: Why So Many Businesses Fail
82% of businesses fail due to mismanagement of cash flow. Cash flow is the life blood of the business. If your business cash flow runs dry you will be in a stressful, difficult situation. At SCG, we like to maintain a cash flow forecast that is forward looking by at least three months. More can be better, however much can change in a business in three months and even more once you look over three months out. The further away the forecast is from the current moment, the less accurate it will be. That’s why it is critical to make adjustments to your cash flow forecast at least weekly.
In a cash flow forecast we are measuring two things: outflows and inflows. Outflows will be expenses and asset investments (inventory, equipment, etc.). Inflows will be income from your various channels. You should have a budget, demand plan, and sales forecast that has been generated through an S&OP process. These three things will easily allow you to forecast your outflows and inflows. I cannot stress how important it is that your cash flow forecast uses inputs from your S&OP process. This ensures alignment between all functions of the business and creates a clear connection between each. For example, if the sales team misses forecasts they should know exactly how that will impact the cash flow forecast. If the operations team does not order according to the demand plan generated from sales forecasts then cash flow will be strained by either too much inventory being purchased or because inflows are constrained due to stock outages. Everything is connected through the S&OP process.
One of the biggest reasons businesses fail is because they grow broke. Growing broke means the business is not able to generate enough profit to sustain the rate of growth it is experiencing. Growth is typically a good thing but not if it creates cash flow problems that you are unable to address. With a cash flow forecast you can typically foresee problems before they occur and take steps to address those problems. Solutions could involve seeking additional capital like equity investments, lines of credit, or long-term loans. You could also seek to cut unnecessary spend or negotiate more favorable terms with suppliers. When cash flow problems are seen in advance there are many options to solve those problems, however, when not foreseen, options will be limited.
You can reduce the stress that’s caused by financial uncertainty. At SCG we will work with you to create and maintain a cash flow forecast that is updated weekly with recommendations for improvement. This way you can foresee potential problems and work to avoid them. Consider us your ever-present watchmen.
